If you’ve been following TechCrunch’s coverage of venture capital, you might have noticed a few interesting mixed signals. One article cites the fact that some VCs aren’t doing a great job of providing corporate governance counsel to their portfolio companies. Another article points out that some LPs are directly investing in startups, rather than seeking out a VC first.
Series A financing has become more stringent
Series A financing is one of the earliest stages of capital-raising for startups. This process requires a number of requirements and an accurate valuation. In addition to providing an accurate value, it demonstrates the company’s potential to make a profit in the future.
Venture capital firms are the main investors in series A funding. However, individual investors and private equity firms also play a role. Some of the key considerations include how much money is needed, how the company plans to use its funds and its business strategy.
Another factor that can help a company to get more out of its funding is a well-designed business plan. Creating an effective and comprehensive business plan can allow a company to expand its customer base, develop new products, acquire other businesses and exploit new markets.
For some companies, the best way to attract investors is to show them a large sum of money. That means bulking up on advertising and sales. Depending on the product or service being marketed, this may require the purchase of quality talent. It could even mean selling some of the company’s assets.
LPs directly investing in startup funding
If you’re interested in startups, there’s one resource you should keep an eye out for: limited partners (LPs). These are individuals or institutions that are invested in a venture fund. They can range from institutional investors like pension funds and endowments to wealthy families and private equity firms.
LPs have become a powerful source of energy for venture capital. With their ability to demand capital allocation, they can help boost returns. But they can also cause premature exits, too.
As the VC industry has grown, the number of LPs has increased, too. Today, there are nearly 100 deals in the startup funding sector per year. This is a big increase from the 40-60 deals per year that LPs were doing in 2008-2011.
One reason for the increase is the rise of equity crowdfunding. The JOBS Act has created new avenues for startups to raise capital. There are also more LPs that want to go direct.
VCs’ lack of corporate governance counsel
VCs are in the business of backing up promising startups. To succeed, VCs must make smart investments. They must build a relationship of trust and leverage with their entrepreneur partners. Then they must negotiate a contract that will ensure their success over the long term.
Typical VC deals require a great deal of paperwork. VCs invest money from high net worth individuals, insurance companies, enterprises, university endowments and more. These sources are highly motivated to create value for society.
VCs often make the mistake of focusing on one factor in their negotiations, such as valuation, instead of another, such as the liquidation preference. This can lead to a less than optimal outcome.
Founder-centric deals have become more common in the startup ecosystem. Startups have gained more bargaining power due to an increase in funding. This has increased the influence of entrepreneurs on the board level and moved the bargaining chips in their direction. But entrepreneurs need to look beyond the contract to understand the bigger picture.